The competitions are increasing rapidly in marketplace. These increasing competition can cause threat to every ongoing business. So it becomes important to determine such competitions and make strategies to exist in the market.
What is Five Forces Model?
The Porter’s Five Forces of Model is a tool which analyses a business competition and helps determining the level of competition an industry can face. This model was given by Michael Porter (a Harvard Business School researcher) in 1979.
The tool focuses on five forces which can have an impact on the whole industry. Even after 40 years, it’s one of the effective methods widely used to do competition analysis.
Five Factors to Analyse Industry Competition
According to this model, the five factors to analyse industry competition are:
1. Threat of Entry
We have already seen the rapid competition among the brands and industries. The new brands entering the market are creating competition for the existing brands as well as in the industry. But what if there are high cost and lots of process required to enter in the industry? There will an entry barrier among such industries.
But what if it is easy to set up a business in the industry? Then there will be more threat of upcoming competitors in the market. So under this factor, the threat of entry will determine the industry competition. If there are difficult or strong barriers then business will have fewer competitors.
For Example: It is not easy to enter in the Airlines Industry as it involves huge cost. So the industry will always have few players than most industries. But it’s easy to set up a café in the town. So there will be more players or more threat of entry in this field. The business dealing in the industry will be able to earn a limited amount of profit because there are more players in the market.
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2. Threat of Substitute Products or Services:
There are industries which have no or few close substitutes available in the market. But there are also industries which have one or more substitutes available in the market. The companies dealing in the industry with no or few closer substitutes will have an advantage than the ones with more substitutes. Even if the company increases its price to earn more profit, the customers will have to buy the product.
But in the other market with more substitutes, if the companies increase the price then the customers will switch to substitute products. So the number of substitute products or services will determine the competition of the industry.
For Example: There are more vehicles running on petrol, so the increase in the price of petrol won’t cause any change in the demand. There are no options available with them. But if the price of coffee will get increased, then people may switch towards tea (which is closer substitute of tea).
3. Industry Competition
An industry competition comprises the total companies which deal in particular industry. If there will be a large number of companies in the same industry, then the competition will be high. There will be cut throat competition in the market. Even a single change in the price or quantity can show more response in the market. The consumer’s enjoy lots of available opportunities with them.
If companies increased a slight price in the competitive environment, then the customers will switch to other suppliers. If any company started giving exclusive deals and products at discounted rates, then the customers will move towards such business. The customers’ loyalty is diminishing these days. Consumers are much focused towards getting quality products at cheaper rates.
In such a market, the businesses are dependent upon market forces to determine the prices. But if there is less competition in the industry, then the companies will have the advantage of maximising the price and earning huge profits.
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4. Bargaining Power of Suppliers
In the market, the powers remains among such businesses whose products are more demanded and few suppliers are there. So if you deal in such a business where the raw materials are heavily demanded and available with few suppliers, then you may have to suffer from the strong bargaining power of suppliers.
The suppliers can sell the materials at a higher price, and you have to take it because you need raw materials to run your further business operations.On the other hand, if there are more suppliers and raw materials are easily available, and then you will be able to buy materials at fewer rates.
Suppose, a person running a shoe manufacturing unit will be dependent upon the leather. If there are less leather suppliers then the shoe brand will have to pay more to get leather. His business unit will solely be dependent upon leather because he cannot make shoes without it. So anyhow, he will have to buy the leather even at high price.
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5. Bargaining Power of Buyers
The business enjoys huge profit if the product is scarcely available i.e. heavily demanded but quantity is less. Whenever the demand of product gets increased, its price also gets increased. The heavy demand of products requires more products to be supplied. But due to the limited availability, the product only reaches in few hands.
There will be more buyers in the markets, but few sellers. In such a case, the buyers will have to accept the product even at high price. But consider if there are more sellers in the market? In this case, the buyers will have more power to bargain and get their price reduced.
So the business will have to sell products at less cost. By this way, he will earn low profits. If the business doesn’t reduce cost, then the customer will switch to other seller and his stocks will remain unsold.
The customers become more sensitive to price if they find more options in the market. If the industry has more sellers, then the company won’t be able to earn more profit. He will have to agree with the buyer, because of large number of sellers available. So companies dealing in such industry will have more threat to buyer’s bargaining power.